Rio Tinto Group Financial Analysis - Case Study Example

Name : xxxxxx Tutor : xxxxxx Title : Financial statements Course : xxxxxx Institution : xxxxxx @ 2010 Introduction Rio Tinto Group Character The character of Rio Tinto which is a modern-day business is the obligation to serve all of its stakeholders. In all that we do, Rio Tinto follows the very best practices in safety, ethical business, social and environmental responsibility, and sustainable development. Capacity The capacity of Rio Tinto is in the sense that it is one of the world's top mining and exploration companies. Rio Tinto products include aluminium, energy products, copper,gold, industrial minerals, diamonds and iron ore. Collateral Rio Tinto almost operates on every continent having a scale and global presence. Capital The main strategy of Rio Tinto is largely invest in a lengthy life and cost cutthroat mines driven by the superiority of prospect, not preference of commodity guided by the objective of maximizing profit to investors.  Conditions The conditions of operations are well stipulated by the board of directors, which is formed by an experienced group. Financial statements According to Rio Tinto statement of financial position which is commonly known as balance sheet has clearly indicated that the assets, liabilities as well as the ownership equity are well stipulated and give the company a good position of performance. Cash flow statement Rio Tinto cash flow statement provides information on the liquidity and the ability to change cash flows. As argued by Peter & Eddie (2000, p.78) cash flow statement gives extra information on evaluating assets, liabilities and equity. The adoption of cash flow statement is simply because of the elimination of allocations which can be derived from various accounting methods. Financial ratio analysis 1. Long -term solvency or Gearing Ratios They are used to evaluate long-term solvency of firms a. Times interest earned ratio This ratio indicates the ability of the business to finance interest charges on long-term loans. =It is given by Profits before interest and tax divided by Total interest charged 8,292/1,136 =7.23 According to Peter & Eddie (2000, p.78) ratio analysis evaluates a company's financial statistics over a period of time and the procedure is known as trend analysis. Trend analysis, helps identify trends whether good or bad. Ratios show how your company is stack up against other businesses, both in and out of your industry. 2. Short-term liquidity or the liquidity ratios It is the ability of a firm to settle its obligations or debts otherwise it will be insolvent or illiquid. The above chart shows a liquidity ratio for Rio Tinto a. Current ratio It shows the number of times the current assets can cover the current liabilities. The ratio 2:1 is desirable It is given by; Total Gross Current Assets Current Ratio = ____________________                         Total Current Liabilities 14,932/9,429 =1.6 which is equivalent to 2. According to Vincent, Sathye $ Boffey, (2003, p. 28) current ratio usually focuses on whether company has an adequate amount of current assets to meet the expense timetable of its current debts with a margin of security for probable losses in current assets. According to the current ratio of Rio Tinto Group, the group is in a good position of getting credit or borrowing more money from the VU bank. Quick ratio It shows the number of times the relatively liquid current assets can cover the liabilities. The ratio 1:1 is desirable It is given by; Current assets less stock and then divide by current liabilities 14,932-4,889= 10043 10,043/9,429 = 1.1 According to the quick ratio of Rio Tinto Group, the group is able to cover its liabilities and so it is in a stable financial position with a good performance and this also shows that it not facing a business risk. As noted by Peter & Eddie (2000, p.78) the VU bank which is a potential creditor will use this ratio in establishing the company's capacity to forfeit off under the worst probable situations. 3. Efficiency Ratios They are used to indicate the vigorousness with which the business is running its operations. It indicates the business performance. The black line show the non-consolidated and the purple line show the consolidated figures. a. Debtors turnover It shows the number of days it takes the business to collect cash from the credit customers after making a credit sale. (Vincent, Sathye $ Boffey 2003, p. 67) The lesser the number of days, the more efficient is the debtor policy. It is given by: Debtors multiplied by 365days and then divide by the amount of credit sales 4447 * 365= 16233155/44,036 =36.9 or 40 days b. Creditors turnover It shows the number of days it takes the business to pay supplies after purchasing goods from them on credit. It is given by: Creditors * 365 days divided by credit purchases 5,759 * 365=2102035/4,889 = 429.952 c. Stock turnover It is the number of times it takes to realize stocks in a year. It is given by: Cost of sales divided by average stocks or inventory 13181/6591 = 2.0 4. Profitability ratios Are used to measure the profitability of the business. The higher the ratio the better for the business a. Gross profit margin Shows the amount of gross profit earned in every sh. 100 of sales It is given by Gross profit divided by sales 7,506/44,036=0.17 b. Net profit margin It is given by Net profit after sales divided by sales 5,784/44,036=0.13 The profitability ratios of Rio Tinto Group show that the company’s performance is low and hence in an unstable financial position. They are used to help the company on determining on how to invest. As a credit analyst for Rio Tinto Group I would use the liquidity ratios .This is because they show the ability of a firm to settle its obligations. If a firm is unable to settle its debts then it can be declared bankrupt or insolvent. Rio Tinto group has a current ratio of 1.6 which is equivalent to 2 and a quick ratio of 1.1 which is equivalent to 1.This ratio show that the firm is at a good position to cover or pay for its obligations and therefore as a lender I will be in a position to lend the firm some cash. I would also use profitability ratios to determine its financial position before lending it money. (Vincent, Sathye $ Boffey 2003, p. 89) In this case Rio Tinto Group has low profitability margins. The ability of a firm to pay for its loans depends on the profit made but this firm seems to be making low profits and therefore as a credit analyst I would consider their low profit as leading to low performance and hence withhold credit from them. A Financial risk is a risk that a company will not have enough cash flows to meet its operating expenses. A Business risk is an inherent risk of operating a business and it represents a firm’s uncertainty of return on its assets. A business risk can also be accidental which occur naturally and are not part of the core of the business. Rio Tinto Group is going through a financial risk since its cash flow is 13,224 unlike its obligations which sum up to 51,311 hence unable to meet its obligations. (Vincent, Sathye $ Boffey 2003, p. 77)This firm is also facing a financial risk since it is unable to meet its obligations and also goes ahead to get interest payable credit. Rio Tinto is not undergoing a market risk. Being a iron ore producer, getting credit will help it increase it production and hence it sales and this will make the firm to perform in the market The risks will help Rio Tinto company in determining the probability that there is a threat or the probability that there are vulnerabilities as well as the potential impact of the business. References 1. Douglas Hubbard 2009 The Failure of Risk Management: Why It's Broken and How to Fix It, John Wiley & Sons. 2. Sathye M, Bartle J, Vincent M, & Boffey R; 2003; Credit Analysis & Lending Management; Wiley; ISBN 0-470-80041-0 3. Eugene F. Brigham, Joel F. Houston. 2007. 11th ed. Fundamentals of financial management. Cengage Learning 4. Pat Choater, 2008. Dangerous business: the risks of globalization for America. Alfred A. Knopf, 2008 5. Peter Atrill and Eddie McLaney. 2000 Accounting and Finance for Non-Specialists Prentice Hall. Read More